The Bank of England (BoE) announced that it will not raise the base rate of interest from its current level of 0.5% at least until the unemployment rate falls to 7%.

Currently, the unemployment rate stands at 7.8% and it is expected to remain above 7% until at least 2016.

In the Monetary Policy Committee's (MPC) "forward guidance", the body said: "The MPC judges that 7% provides an appropriate point at which to reassess the state of the economy and consider whether or not it should start to withdraw the current extraordinary levels of monetary stimulus."

However, the link between base rates and unemployment rates will "cease to hold":

- if it becomes likely that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;

- if medium-term inflation expectations no longer remain "sufficiently well anchored" or;

- if the Bank believes that the strategy "poses a significant threat to financial stability".

Buck Consultants head of employer consulting Marcus Hurd said that the Bank's announcement may eventually provide a "welcome boost" to scheme, sponsoring employers and members.

He said: "The new policy of forward guidance looks likely to reduce any future increase in the use of quantitative easing (QE) – a prospect that had been causing concern in pensions circles – following a rise in long term gilt rates in reaction to [yesterday's] announcement."

Hurd added: "Whilst it is still too early to call, this change in policy and the reaction it has generated gives rooms for cautious optimism for future pain relief. If so, it will not have come a moment too soon."

Marian Elliott, Spence & Partners' head of trustee advisory services, said that the BoE's guidance could have different impacts for UK defined pension schemes across their liabilities and assets.

She said that there should not be an expectation that pension liabilities will reduce significantly on the back of rising gilt yields until the unemployment conditions are met and interest rates begin to rise again.

"Whilst the outlook for liability levels is not rosy, schemes may find some comfort in the possibilities of growing their assets," Elliot said.

Elliot added: "Whilst the forward guidance was hardly a revelation, it did clarify the position of the new BoE leadership. Trustees would do well to consider how the stance the Bank is taking may affect their scheme and allow for this in their funding and investment decisions."

First published 08.08.2013

monique_simpson@wilmington.co.uk